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An Alternative to Performance Bonds for Municipal Street Sweeping |
by Jere Costello, president, CleanStreet, Inc.
Due to the tragedy of 9/11 and the collapse of many re-insurance companies, as well as the failure of many bonding companies, bonds are much more difficult to obtain today than they were before 9/11/2001. In California, street sweeping services have historically been considered 'janitorial work.' As a result, it is exempt from Public Works rules and regulations and no license is required to perform street sweeping. Requiring a performance bond is indicative of a Public Works contract and may unnecessarily cause the entire contract to be subject to Public Works rules. These rules have the effect of limiting a city's prerogatives, as well as increasing the cost of service. As an example, performance bonds are appropriate for a construction project such as the building of a bridge. If the contractor fails in building the bridge, the city can recoup 100% of the cost of rebuilding the bridge properly. However, a performance bond is not appropriate for a street sweeping contract. In contrast, if a sweeping contractor fails then the city can easily find a new contractor to take over at very little, if any, additional cost. If forced to replace a contractor, the likelihood is that a city would probably have no damages, or at least very little damages. Even if a contractor fails, a city would have a difficult time proving damages and collecting on a performance bond. Litigation could take years. That's why, in the last analyses, performance bonds are an unnecessary waste of money. Bonds are not only expensive, but require the pledge of assets equal to the amount of the bond. This creates a hardship, in that it ties up assets for the life of the bond for which they are pledged. To address the shortcomings and cost of performance bonds, we are recommending to cities that we guarantee the performance of our contract with a letter of credit or a certificate of deposit in the amount of one or two month's service. With these, if a contractor fails, the City Council can formally determine a breach and collect on the letter of credit or certificate of deposit immediately without controversy or litigation. This form of security actually increases a city's power and prerogative over a failing contractor. Using one of these latter forms of security could, in fact, prevent failure, precisely because the contractor will be well aware that the city can more easily collect. For all of these reasons, many cities are re-thinking their performance bond requirements and choosing to guarantee performance within a letter of credit or certificate of deposit. Most of our municipal clients have been with us for many years and trust us to do our work well. Consequently they do not require a performance guarantee for our contract.
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